hermann industries is forecasting the following income statement: sales $8,000,0
ID: 2667146 • Letter: H
Question
hermann industries is forecasting the following income statement:
sales $8,000,000
operating costs excluding depr & amort. 4,400,000
EBITDA $3,600,000
depreciation & amortization 800,000
EBIT 2,800,000
Interest 600,000
EBT 2,200,000
Taxes (40%) 880,000
Net income 1,320,000
The CEO would like to see higher sales and a forecasted net income of 2,500,000. Assume that operating costs (excluding depreciation and amortization) are 55% of sales and that depreciation and amortization and interest expenses will increase by 10%. the tax rate, which is 40%, will remain the same. what level of sales would generate 2,500,000 in net income?
Explanation / Answer
According to the given problem, Net income = $2,500,000 But we know that, Net income = EBT - Tax $2,500,000 = EBT - (0.4* EBT) $2,500,000 = EBT (1 - 0.4) $2,500,000 = 0.6 * EBT EBT = $2,500,000 / 0.6 = $4,166,667 Therefore, the value of EBT is $4,166,667 EBIT = EBT + Interest But there is a 10% increase in the interest expense. New interest expense = 10% ($600,000) + $600,000 = $60,000 + $600,000 = $660,000 EBIT = $4,166,667 + $660,000 = $4,826,667 EBITDA = EBIT + Depreciation and Amortization Also Depreciation and Amortization will increase by 10% Depreciation and Amortization = 10% ($800,000) + $800,000 = $80,000 + $800,000 = $880,000 Substituting the values of Depreciation and Amortization in the above equation, we get EBITDA = $4,826,667 + $880,000 = $5,706,667 We know that EBITDA = SAles - OPerating expenses $5,706,667 = Sales - (0.55 * Sales) {Since Operating expenses are 55% of sales} $5,706,667 = SAles (1 - 0.55) $5,706,667 = Sales (0.45) Sales = $5,706,667 / 0.45 = $12,681,482 Therefore, the new sales will be $12,681,482Related Questions
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